Pacira BioSciences, Inc.

Good day and thank you for standing by. Welcome to the Q2 2021 Pacira Biosciences, Inc. earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, Please press star zero. I would now like to hand the conference over to your speaker today, Susan Mesko, Head of Investor Relations. Please go ahead.

Susan Mesko Thank you, Dawn, and good morning, everyone. Welcome to today's conference call to discuss our second quarter progress. Joining me as speakers on today's call are Dave Stack, Chairman and Chief Executive Officer, and Charlie Reinhart, Chief Financial Officer. Additional members of the PACIRA Executive Leadership Team are also here for our question and answer session. Before we begin, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. For information concerning risk factors that could affect the company, please refer to our filings with the SEC, which are available from the SEC or our website. With that, I will now turn the call over to Dave Stack.

Thank you, Susan. Good morning, everyone, and thank you for joining us. We are taking a new approach on today's call, and we'll limit our prepared remarks to a few key highlights, allowing us to take more time for your questions. We made terrific progress in the first half of 2021, with momentum growing in the second quarter. Second quarter revenue of $135.6 million notably ramped up our bottom line, with adjusted EBITDA coming in at $50.3 million, both record levels for a single quarter despite ongoing COVID-related challenges within the elective surgery markets. All market dynamics point to the strong momentum continuing for the remainder of 2021 and beyond, reinforcing our outlook for growth over the next five years with expectations for ex-pareil annual sales growth percentages in at least the high teens, gross margins improving to the mid-80s, and modest increases in operating expenses. These key trends should allow Passura to deliver operating margins that exceed 50 percent within five years. I'll start with a quick update on the lawsuit filed against the American Society of Anesthesiology seeking damages and the retraction of three articles published in their journal, Anesthesiology. This process is in the early stages and our next step will be moving towards discovery to advance this case towards a resolution. While the timing is on exactly how this will play out is difficult to predict with any level of certainty, I can tell you that we are confident in our position that the publications are maliciously false and misleading. This is laid out clearly in the declarations on our website. We have not seen any material impact with XPREL's value proposition continuing to drive strong demand. At the same time, we cannot allow these false and misleading publications to be referenced as fact on a go-forward basis. Turning to the rollout of XPREL in pediatrics, we are now several weeks into the launch, and it's going even better than we anticipated. As you know, we deployed a thoughtful, gated approach to the launch, targeting KOL influencers. This has proven to be a winning formula as we are seeing a high level of acceptance from prominent thought leaders. For example, XPREL uses rapidly expanding in scoliosis surgery, which is one of the most extensive, invasive, and painful orthopedic procedures. Spine is a tight-knit group of like-minded surgeons who are highly motivated to minimize exposure of children and teens to opioids, given the population's elevated risk for persistent opioid use. We have been delighted with the high level of receptivity and enthusiasm from prominent thought leaders who are providing a rapid transfer of best practice for establishing expert-based protocols as the new standard of care, specifically in the near term through presentations at local and national pediatric meetings. Medical education is a core component of our pediatric strategy. our team is successfully securing the engagement of thought leaders from top children's hospitals. We are partnering with the top echelon of early adopters to deploy the education across their networks and spheres of influence using programs like fellowship training, ask the expert panels, technique workshops, and awareness campaigns. These key influencers are also generating data using Expirel in a broad range of procedures at leading institutions around the country, such as Reedy Children's, Texas Children's, Scottish Rite, and the Shriners Hospital Systems. We are now broadening our launch initiatives to our full customer-facing team and expect to trigger a chain reaction within the pediatric community that will ultimately shift Expirel-based multimodal protocols to the standard of care for this vulnerable patient population, replacing pumps and catheters-based pain management. The pristine safety profile of Expirel will continue to be the hallmark of our positioning across all pediatric and adult settings. This is validated by the over 8.8 million patients treated in the United States since launch. The pediatric indication and label further underscore the safety of our DepoFoam platform, which does not have any of the toxicity and safety warnings we have seen within the package inserts for other drug delivery technologies, specifically in the pain space. Shifting gears to women's health, COVID has escalated the need for many breasts plastic, and oncology surgeons to expedite discharge for their patients. With Expirel, they are now able to meet the needs of women who demand an opioid-free experience and who don't want to stay in the hospital overnight, while simultaneously optimizing their care experience through better pain management using Expirel-based ERAS protocols. C-section adoption continues to grow, and OB-GYN surgeons and anesthesiologists are leading the charge for evolving protocols to minimize opioids and provide new mothers with a better recovery experience after C-section. Looking ahead, we see this opportunity gaining additional traction as society meetings return to in-person settings to bring hands-on education and training to life. Turning to the lower extremity block, In May, we reported top-line results from our STRIDE study. STRIDE was designed to evaluate Expirel as a single-acting local analgesic with no preoperative multimodal therapy in the study design to bridge upfront coverage for Expirel, which differs from real-life practice. While the study did not achieve its high hurdle for the primary endpoint, We view the results as a highly valuable opportunity to work with the FDA on defining a pathway for adding a 96-hour indication to our label. We are preparing to meet and discuss the STRIDE study and our lower extremity nerve block strategy with the FDA in the third quarter. The design of the follow-on studies is underway. We believe these studies can be executed seamlessly as STRIDE gives us a strong foundation. We are currently planning a study evaluating a pulpateal sciatic nerve block in patients undergoing bunion surgery. We will only use those sites from STRIVE that were successful and followed appropriate protocol and technique. We are also initiating a phase three adductor canal field block study to provide specific package insert guidance for dose, volume, use of freebupivacaine, and administration technique. We intend to launch these studies in the second half of this year. Keep in mind that as far as our five-year plan, the stride outcome does not material impact our outlook, as we believe this is roughly a 15- to 18-month delay in achieving a lower extremity nerve block indication in the United States. Internationally, we remain on track to launch XPREL along with Iovera in Europe in October of this year. The year launch will focus on only these markets where we can secure pricing that closely aligns with the price in the United States. COVID has caused a tremendous backlog for orthopedic procedures in Europe, with waiting lists as long as two years. In addition, the typical length of stay in Europe is several days. These dynamics provide an optimal opportunity for both ExPRO and Ayurveda. The Placero portfolio will be positioned to enable rapid recovery after surgery to address the EU markets, high interest in accelerating recovery times and discharge, to increase surgical throughput, and address the post-COVID elective surgery backlog. For Expirel, our initial focus will be regional anesthesia protocol adoption in shoulder and total knee arthroplasty. For Alvera, we will begin by targeting painful osteoarthritis as well as total knee arthroplasty. We envision Alvera playing a key role in the long-term pain management, especially as surgeons and anesthesiologists work through the significant waiting list for elective procedures. Importantly, our broad efficacy label, which covers Expirel administration via infiltration, field blocks, and both upper and lower extremity nerve blocks, along with a superior safety profile, give us a clear competitive advantage in Europe, where Iovera is already approved. To remind everyone, Expirel is approved for a lower extremity nerve block in Europe. We recently expanded our global footprint in one of the fastest growing international markets, Latin America, through our partnership with Europharma. The Europharma team has considerable scale, expertise, and relationships to support X4L expansion. Our initial focus will be on Argentina, Brazil, Colombia, and Mexico. Europharma will be taking the lead in securing X4L regulatory approval as well. We have our first steering committee meeting next month to begin laying out our detailed strategy and timelines. To cover Iovera, Continued sales growth and an expanding customer base underscore the growing level of interest in our educational and commercial programs taking hold and highlight this novel cold technology and its ability to deliver drug-free and surgery-free pain control that endures for several months. Our PREPARE study is proceeding according to plan and set for readout later this year or early 2022. Our iOVERA registry is underway and will capture real-world evidence and TKA procedures and leading centers of excellence. In addition, we will roll out a Generation 2 iOVERA platform later this year, and our development team is successfully developing additional smart tips that will utilize the same handheld device with separate smart tips for low back pain procedures and specific spine procedures. Our clinical development team is also moving to the next cohort of our subarachnoid program for spinal administration and a depo-dexamethasone asset for particulate-free inflammation therapy. We remain very active in the business development front, having invested in both musculoskeletal and chronic pain spaces in the first half of this year. Looking ahead, we continue to advance these two key franchises with a focus on knee and spine continuums of care and bridging to chronic pain. We plan to use the combination of strategic investment that support promising early stage platforms like GeneQuine and SpineBioPharma and in licensing our acquisition transactions to build out a pipeline of innovation. In closing, we feel great about where we stand today and the market dynamics that we are seeing for both products. We will continue to build on our growing momentum and remain highly confident in our growth outlook. Looking ahead, we fully intend to lead the way by expanding the use of Exprel and Iovera and by investing in novel, innovative technologies that are synergistic with our goal to bring non-opioid pain management and regenerative health solutions to patients in need. With the experience and expertise of our management team, dedicated employees, and over $650 million in cash, we are excited about the short-term and the long-term future for Pacira to improve patient care. With that, I'll turn the call over to Charlie to cover a few key topics.

Thank you, Dave, and good morning, everyone. On the financial front, we continue to deliver outstanding results with the second quarter coming in at record levels for the top and bottom lines. XBRL utilization continues to fuel this growth with average daily sales coming in at 178% of prior year for the second quarter and 120% for the month of June. To remind you, in June 2020, XBRL returned to year-over-year performance growth following the peak impact of COVID in April and May. As we look ahead, we believe the robust 20% year-over-year growth rate achieved in the month of June is a strong indicator that XBRL growth is back to pre-COVID growth trends, consistent with our expectation of growth rates in at least the high teens over our five-year planning horizon. With regard to gross margins, we continue to project growth margin improvement of 1,000 basis points over the next few years, with XBRL gross margins reaching at least 85%. This will be achieved through the combination of lower cost manufacturing capacity and steadily expanding volumes. For manufacturing, yesterday we were excited to announce a key milestone ahead of schedule with the FDA's commercial approval of our 200 liter batch manufacturing unit located in our UK facility.

We expect to start selling commercial product manufactured by this unit the current 45-liter batch units.

As we have mentioned in the past, per-unit manufacturing costs from our UK facility are comprised of a higher proportion of variable costs, while those from our San Diego facility have a higher proportion of fixed costs. Consequently, sourcing total XPREL volume demand from our three manufacturing suites in the most economical way will require a bit of balancing. because as we take volume out of the San Diego facility, the per-unit fixed costs for the remaining units produced at that facility will increase. With the FDA's approval of the 200-liter process, we have submitted our new patent for Orange Book Listing. This product-by-process patent, manufacturing of bupivacaine multivesicular liposomes, claims composition of Expirel prepared by our improved processes. and we'll take our proprietary position to January, 2041. Over the last six years, we have invested more than $100 million in a more efficient method for making Expirel in a matter that meets the FDA's rigorous standards for safety and bioequivalence. This new patent is the first deliverable from our comprehensive patent strategy, adding another layer of market exclusivity and underscoring the deep multivasicular liposome manufacturing expertise that we have accumulated over more than 25 years. The Expirel manufacturing processes are highly specific and a core competency proprietary to Pacira that we are committed to safeguarding globally. Remember, Pacira is the only company that has ever manufactured a multivasicular liposome at commercial scale anywhere in the world. Regarding any potential generic expirale, FDA guidance established extremely rigorous hurdles for proving bioequivalence, and this would have to be accomplished without infringing on the PACIRA patent estate, which now includes another strong patent to consider. This would require a multi-year, near decade-long effort to design and construct a commercial-scale manufacturing facility that would also require operational licensure and validation prior to any bioequivalent study requirements by the FDA. This is a long and extensive process with little chance of duplicating the XBRL pharmacokinetic profile, since we have never disclosed our proprietary batch specifications or release assay. In short, we have great confidence that we'll never be a generic XBRL, and given the package inserts we have seen for potential competitors, We believe Expirel will remain the branded market leader for many years to come based on safety across a broad range of infiltration, field block, and nerve block procedures for both adults and pediatrics. While we are currently not providing 2021 guidance, given the continued uncertainty around COVID-19 and the pace of recovery for elective surgery market, we will continue to report preliminary monthly product sales to share intra-quarter trends with you. We will consider changing this practice as we have more visibility post-COVID. The COVID variants with increasing infection rates and the lack of clarity around soft tissue surgeries delayed by COVID returning to the market in the back half of this year lead us to the conclusion that providing guidance at this time is not warranted. We remain bullish in our long-term expectation for robust top and bottom line growth, and we are confident in our five-year plan, which is on track to deliver revenues that will approach $1 billion for Expirel and $200 million for Iovera, gross margin improvement of 1,000 basis points, and operating margins that exceed 50% by the end of our planning period. With that, I'll ask the operator to begin our Q&A session. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Amsalem with Piper Sandler. And David Amsalem, your line is open. Please go ahead. Please check to see if your phone is on mute.

Our next question comes from the line of Daniel Busby with RBC Capital Markets.

Hey, good morning and thanks for the questions. I've got a couple. First, with respect to elective procedures that were pushed out of 2020, can you talk about what you saw during the second quarter in terms of the number of those procedures that came back and have your expectations for the second half of the year changed since your last update? I think in the past you've talked about roughly half of the 4 million warehouse procedures potentially coming back during the second half of this year. Second, the situation with Delta variant is clearly still evolving, but thus far, have you seen any impact on overall procedure volumes or XBRL use, particularly in those regions of the country that are most affected?

Thanks, Daniel. First of all, you know, I mean, we thought that there were 4 million procedures that were not performed in our TAM in 2020. As we went into the last Q call, We revised the number of patients who we thought would come back for procedures in 2021, 2022 to 3 million, given the number of patients who expired. Really important, the number of patients who no longer had employer-provided insurance. And so, you know, that number was dropped largely because of the environment and some of the things that have happened as a result of the COVID experience. So far, what we've seen is in the quarter, very little difference, Daniel, as we went through the second quarter. As we got to the last couple of weeks of July, we did see a little bit of softness in the marketplace. We frankly don't know whether that was related to vacations, and we have seen some fairly protracted vacations in the marketplace with folks just saying, look, you know, I've got a huge backlog, but my family really needs to get away and spend some time together, and we certainly all understand that. So we don't know, frankly, whether that's anything related to Delta or whether that's just a July phenomenon that we would have seen under any circumstances. I mean, I can tell you that, you know, we've already disclosed, of course, you know, the first couple of months. And July was, you know, what you would expect for July on a forecasting basis. So I guess the broad answer is nothing material. We are watching some hospitals in certain specific areas, as you mentioned, that are sequestering beds for COVID again. But so far, we've seen no impact on the AFC or the HOPD, which are now responsible for over 70% of our business. So we think that the impact will be muted in any case.

Got it. Thanks for the color. If I could ask one follow-up on capital allocation. You're in the enviable position of having cash and investments of almost $650 million and growing. And I realize that your priority is business development. But in the absence of suitable targets, and specifically large targets, is there a point at which you start thinking about returning some of that cash to shareholders, whether via share repurchases or perhaps a special dividend?

Yeah, we've initiated that discussion with the board, Daniel. We haven't made any decisions on that yet, but clearly our preference would be to create value by bringing in additional assets that benefit from the relationships we have with anesthesiologists and orthopedic guys and spine, et cetera. In the absence of our ability to find those kinds of assets, we are talking to a capital allocation that would return, you know, funds back to the shareholders. But, you know, we're not there yet. And we have a number of things in business development that we're actively pursuing. But over time, you know, and Charlie outlined, you know, that we expect that our net income is going to grow quite rapidly as the top line grows. So, you know, there may be a point even with, you know, some aggressive BD and even with large targets, that we'll be in that position several years down the road. But I don't think we're looking at that in the short term.

Daniel, don't forget that in the near term, on April 1st of next year, we have $160 million of the first convert comes due. So that's also in our time horizon.

Okay. Thanks.

And your next question comes from one of David Amselm with Piper Sandler.

Thanks, and my apologies for the tech issue before. So just a couple of questions. So first, I wanted to get your latest thinking regarding long-term operating leverage, particularly with Swindon Online. This isn't a question about, say, 2022 guidance, but really more about how you think about the direction, not just of gross margins, but also EBITDA margins. Also realize that capital allocation and acquiring other assets is a priority. But ideally, do you have a long-term EBITDA margin target that you'd like to share, particularly now with Swindon online? So that's number one. Number two is on the foot and ankle study on Stride. And I apologize if I missed this. So you've talked in the past about another study. Can you just go into more detail on what you think you need to do to sort of get over the hump, so to speak, regarding that zero to 96-hour endpoint, if indeed that is still going to be the endpoint going forward? Just help us understand your thinking on next steps on that program.

Thank you. Sure. And, David, let me start by saying, We don't intend on this call to give long-term net income guidance, and I'll try not to do that, actually. But we think we're in a very strong position. We have to start out with gross margin, and I'll ask Charlie to give any comments he has here in a second. But if margins improve to something over 85%, and we think that we're in a position where frankly, we've disconnected the generation of additional revenue from, you know, the traditional way of just calculating a percentage of gross sales is all of the expense items. So, you know, we think that our R&D budget stays in the area of $60 to $70 million with everything that we know is currently in the BD pipeline as well as XPREL and IOVERA. You know, SG&A, You know, there's some additional short-term expense in there associated with the legal action against the anesthesia society, but that's a short-term issue. We will only add, you know, a nominal number of additional reps on an annual basis. And so, you know, we're thinking something in the 5% to 6% range of increases on an annual basis. So, you know, when we get to the bottom line, you know, the net income, as we said in the script, will be over 50% over the five-year planning period. You know, that could modify to the upside depending on what we find in the BD world. If we don't buy anything, it will clearly be higher than that. But, you know, what we're playing now is that we believe that we will be successful in some of these BD efforts. We will have some access, some capital allocated there. But if you think that If you take our numbers out to $1 billion for Xprel and $200 million for Iovera, you calculate a gross margin in the 85% range for both products. You keep R&D relatively steady. You nominally increase SG&A. You will come to your own conclusion about where the net margin is, and that leads us back to Daniel's question about some type of a special distribution to shareholders or something because we will be generating a lot of cash. On your second question relative to stride, you know, it was a bit of a false scenario that was set up by the FDA that there was no additional multimodal therapy that was used in addition to HPRL for that first 12 hours. In a new trial, we will accommodate that There's actually two trials, David. One is going to be the traditional foot and ankle trial, where we will use an additional therapy that will bridge the first 12 to 18 hours, and we will still extend out to 96, we believe, and 96 will be the primary endpoint here. We also are doing an adductor canal trial. largely because we want to put a specific need trial for this field block into the package insert with some specific instructions around dosing. But we also expect to have a similar duration of activity, and there the marketplaces very much form the ERAS protocols around a multimodal strategy, and so we'll do the same thing. The market's a little bit confused why we didn't do anything for those first 12 hours in this trial. Really, the only opportunity the FDA gave us for lower extremity nerve block here in the United States was either to do a non-inferiority trial, which would have meant we had over 600 patients in that trial, or study Expirel alone for the first 12 to 24 hours. you know, they now know what we knew then that, you know, we do need a multimodal design for those first 12 hours. And then XPREL is at full strength and takes us out to 96. Okay. Thanks, Dave. Thanks, David.

Your next question comes from the line of Christopher Nayer with JP Morgan.

Great. Thanks for the questions. First one's on Blu-ray extremity nerve block. So following up on kind of the earlier question, I'm interested in what feedback you've heard from physicians and KOLs on the stride study, and specifically on the 12 to 96 hours of pain reduction. And you referenced 15 to 18 months deferral and timeline. So what's underpending that view, and what are the key hurdles for getting this indication across the goal line at this point?

You know, it's just a matter, Christopher, of just getting the trial done. We will meet with the FDA. They can clearly see now that there is some additional therapy needed in the additional 12 hours post the surgery and we'll go back with those protocols. We have successful sites that were in stride. Those sites remain available to us. They're very modest changes to the case report form and to the CRM and to all the other stats programs, et cetera, that are very time-consuming in getting these things up and running. So we expect to have this trial up and running in a very short period of time here. And it's the only thing that keeps us from having this thing be successful is to get the patients through a site that is going to you know, abide by the protocol and not make, not have protocol violations, which were the problem with the other stride, you know, with the most recent stride study. So, you know, we think 15 to 18 months would be aggressive under normal circumstances, but we think given this scenario where we've got the same sites, well, not all the same sites, but the same sites that did the trial correctly and frankly were responsible for the 0.03 primary this statistically significant primary endpoint in the beginning of the trial at the interim analysis. So we have great confidence that we know how to do this. It'll be a minor adjustment to the protocol. And we will separate out the sciatic for the lower extremity nerve block and then the adductor canal block for the knee and do two separate trials that will give us adductor and lower extremity. You know, we don't know, frankly, whether the FDA then would use that to give us a broad label for the lower extremity. But if we have foot and ankle and knee, basically we've got the vast majority of all the procedures covered. So it'll be very much like brachial plexus for the upper quadrant, right? It's not a broad label, but it basically covers all the procedures. So no harm, no foul.

That's helpful. And then a second question on ivera. So specifically on kind of uptake curves over the next 12 to 24 months, How do you think about the size of opportunity relative between knee and osteoarthritis? And just what are the key drivers kind of building out this market near term?

Yeah, it's surprising to us, I'll be candid up front, that there's great interest in the anesthesia community around using iovera for OA pain. So, you know, what we purchased from Myoscience really all were primarily related to knee. So if you look at the PREPARE trial, it's using Iovera, you know, several weeks before the procedure to get the patient out of the wheelchair or going up and down stairs, et cetera. So we bring a better patient to the OR, then use Expirel for the, you know, the pain storm of the TKA procedure itself. And the PREPARE trial is measuring functional outcomes. How does that patient do in PT? Do they have better long-term prognosis once they go back to work? And a lot of these questions, frankly, Christopher, are being driven by self-insured employers who want to know, how does this impact? So we're spending the money And what do we get for our dollar? And how does this patient come back to us? Are they better than they were before? Are they the same as they were before? And we'll try to answer all those questions and prepare. There's a number of different ways that you can affect the use of Iovera. The anesthesiologists are using a long needle with a single larger ice ball. And that's typically done under imaging. The sports medicine folks and the ortho folks are largely using the trident needle, which is three probes, and the ice ball forms at the end of each of those probes. Those are typically done with anatomical landmarks, and so they're not using imaging. And that requires a number of injections, generally three or four, or not injections, different administrations, where the 190 needle In many cases, it's just a single ice ball forming because they're actually looking at that right on the ultrasound. So, you know, it's total knee arthroplasty as a procedure. And the primary selling right now for our field force is osteoarthritis of the knee for patients who won't get surgery or can't get surgery because during COVID they went from ASA3 to ASA4. We also have a lot of special situations, people that want to dance at their daughter's wedding, people that are going on vacation with their family and they want to have more mobility, just people that belong to a country club that aren't playing golf or tennis because their knees hurt. All of those kinds of things are coming into play. Generally, the $200 million guidance is largely reflective of just those procedures. On a go-forward basis, I mentioned that we've got a separate tip that we have great confidence will be an effective several-month treatment for medial branch block pain, low back pain, 14 million Americans. We're also looking at very specific spine procedures, working with spine surgeons and spine anesthesiologists who have been the people that have actually driven a number of these protocols and are working with the prototypes on how we address the pedicle and how we actually administer these products. There is a lot of activity now and great interest, frankly, in spasticity. Looking at spasticity in kids specifically was from some of the Shriner physicians. Currently, they're using Botox, which is administered on a trimester, on a three times, four times a year basis under general anesthesia. We think we can improve that with cold. We're looking at rib fracture and cardiothoracic procedures. So there's a number of opportunities outside of the knee, you know, OA in shoulder, OA in foot and ankle, OA in the wrist. You know, so all of those things lead us to believe that this could be a very big product if we catch a couple of breaks and if we can really be very specific with the way we engineer these tips to address these specific situations. Great. Thanks for taking the questions. Oh, my pleasure, Christopher. Thanks for your interest.

Your next question comes from the line of David Steinberg with Jefferies.

Thanks very much. I have a couple questions. The first one is on the backlog of procedures, Dave. I know that you've talked about three to four million backlog. I was wondering if you could give us some sense of the cadence. Do you think most of them could be finished this year, or do you see a high percentage moving into next year? And then, speaking of cadence, with the approval of the Swindon manufacturing facility, perhaps, Charlie, you could help us with, you know, there obviously is going to be some gross margin improvement going forward, and now that this facility is approved and you're going to launch later this year, how we should think about the cadence of the improvement this year, next year, and the year after for margins. Thanks.

Thanks, David. I'll take the first one and turn it over to Charlie. So, you know, what's happening in the marketplace now, David, is a lot of what we're seeing in terms of catch-up in the marketplace is the orthopedic procedures. So, you know, if we go to most of the ASCs now, you'd see a an OR schedule that is mostly hips, knees, spine. And the reason for that, of course, is, you know, they're not only highly painful, so you have a very motivated patient population, but they're very profitable. And so, you know, they're expensive procedures. And so the insurance companies are very aggressively moving these cases towards the ambulatory surgery centers and the HOPDs. And so that combination of highly motivated patients and insurance carriers, both self-insured and commercial, as well as CMS, frankly, are moving those patients towards the ambulatory surgery center where XPREL does very well. So that's really been the strength of what we've seen so far. That's driven largely, by the way, by the fact that, you know, an orthopedic surgeon or a spine surgeon has a decade-long relationship with a patient, which is really quite different than a primary care patient who needs a hernia or a hemorrhoid or something like that. And so we're seeing that marketplace, you know, consolidate itself again with patients going back to their primary care doc and then being referred. You know, many of those procedures, David, are ending up in the hospital, in the hospital elective surgery department primarily because You know, the ASCs in many local environments are just in a position where they don't have to take low profit margin procedures yet. So as we catch up with the orthopedic procedures, we believe that we'll start to see more of these soft tissue procedures come into the ambulatory surgery market. But we think that a lot of what will happen when the hospitals get back to elective surgeries, that they're going to be stuck with these lower margin procedures that they tried to move out of the hospital through their ambulatory surgery strategies in the first place. So that'll be quite an interesting phenomenon to watch as we get through the rest of this year. We're clearly not going to catch up all three million this year, David. I think if we get into the million and a half, million six range, we'll be in a pretty good spot. And so, you know, we think that there's still going to be something like a million plus of these procedures that carry over into the early part of 2022. The question that we talk about all the time is if you had a hernia or if you've had a hemorrhoidectomy or something like that that's approaching two years before you have an opportunity to get those procedures filled, whether it's insurance or facility availability or whatever, are those patients going to have that surgery? We think the answer to that is yes, but it's not as clear cut as the joints in the spine. Charlie, you want to jump in for a gross margin?

Sure, I'd be happy to. So, David, at this point, with the first 200-liter unit becoming commercially available, we'll start to use that. You know that we have 45-liter batch process units in both the U.K. and San Diego. So as volumes continue to grow, as we're projecting in our five-year plan, we'll start to more fully utilize the 200-liter we'll use the 45s kind of for the backup. Hopefully, in the future, we'll have Depofoam-related pipeline products. So, some of the 45s, probably the San Diego 45s, might be used for both pipeline product and to manufacture smaller batch sizes for rest-of-world usage. We're also developing a second 200-liter unit in San Diego, which we hope comes online kind of end of 24, early 25. So, by the end of our five-year planning horizon, it's quite possible that X4L's U.S. product is all 200-liter product, which would be really great. And at this point, our best estimate is that the gross margins will improve a couple of percentage points each year for the next three or four years as we drive towards those goals.

Great. I just have a follow-up question vis-a-vis your new competitor. And if it's already been asked, I apologize. We were on a previous call. But I assume some P&T discussions have now happened since the Heron drug has been approved. And I'm just curious, you're on many of these formularies. Have you found any instances where you've been knocked off the formulary due to the Heron product? And if so, why? why would that be given that your label is much broader than theirs? Thanks.

Not one, David. So I don't have any – I have no response to the second part of the question. We don't have one.

Got it. Thanks.

Thanks, David.

Your next question comes from the line of Anita Deschamps with Barenburg Capital.

Hi, good morning. Thanks for taking my question. So could you sort of talk about like the procedures that are sort of where experts being used in the pediatric market now and which other procedures it could possibly expand to and kind of along the same lines as per the European launch, what are some of the procedures that are likely to use Experil as the early adopters? And then I have follow-up.

Okay. Thanks, Anita. I'm going to ask Roy. Roy and Winston has been much closer to the pediatric procedure market, so I'm going to ask him to cover that in one second. In the European market, we're focusing largely on knees and shoulders. It's where there's the greatest backlog, and we've got a unique opportunity here where the national health system, the government payer, is working with different groups of surgeons around the country in the U.K. to try to expedite addressing this huge backlog of procedures that they've got. So we're working with these folks sharing our ERAS protocols with them, in many cases showing our, you know, using, having our surgeons talk to these folks and anesthesiologists talk to these folks about how are we doing same-day surgeries, you know, how do our patients, you know, walk out of an ambulatory surgery center three or four hours after a total knee. So it makes the most sense for us to go to those procedures with both Iovera and Expirel. So in Europe, we'll focus on those. Then we'll move that out to spine and hips as we move forward and then work our way backwards into the soft tissue procedures, largely because of the pain profile and because of the really desperate need given pain. In the UK right now, it's a 27-month wait for a total knee arthroplasty. So, you know, we think we've got an opportunity that will take us several years, Anita, to clean up on the front end of this. And so that's where we're going to focus when we launch. And we're well into the prep for that now, you know, educating these guys and sharing protocols, et cetera. Roy, would you, could you give Anita some specifics about, you know, what procedures are leading the way with peds and where they're headed?

uh... sure they're happy to and and they did mention at the beginning that we did a very tight controlled launch we stuck to uh... pediatric uh... the apathic scoliosis because number one that's where a lot of our data within and number two it's an area of great need you have these kids that have these massive back surgeries are usually uh... between the ages of ten and sixteen and they use a lot of opioids and have a tremendous amount of pain. So we launched there, and we found a very rapid uptake to where really the key opinion leaders were rapidly adopting. And from there, there has been quite a bit of expansion. For instance, some of the Shriners hospitals now, and you've got to keep in mind that 80% of pediatric drug use is off-label to begin with, but in lower extremity, they're finding that it's just such an advantage to be able to give kids a block with Expirel instead of using catheters like they used to or plug them into a PCA device. So we're finding a very rapid uptake in areas where kids are currently being served by either IV opioids or catheters. And these are large reconstructive orthopedic procedures, but they're also big abdominal procedures and large thoracic procedures, really all these large painful procedures. And the thing that we are finding, not only among the spine surgeons, but even among the pediatric anesthesiologists, it's a small tight-knit group of We have a lot of people doing quality improvement studies now looking at XBRL, major institutions across the country that are beginning to use. And I think in pediatrics, we expect the trend to continue because I feel like it's one of those things where the motivation is really just to provide the best possible care for patients, and that's all that the pediatric surgeons and pediatric anesthesiologists think about. And I think that's what's led to the very quick uptake.

Yeah, and so, Anita, very specifically, right, the orthopedic procedures Roy's referring to, clubfoot, for example, a significant number of places that are experimenting with burns. Appendicitis is called out as one that one center is using, you know, a lot of product in. Thoracotomies, GIGU. So, you know, and what they're really looking at is a lot of the evolution of what we saw in adults But given all of the experience we have now, there's a number of places where there's very significant interest in getting these kids out of the hospital. And if they were staying in the hospital largely to control pain with opioids or with a PCA pump and they weren't certain that they could keep the catheter in overnight, now they're using Expirel and so there's a lot of interest in that as well.

Thank you so much. That was very helpful. And then just one question related to the I know you are kind of not providing too much guidance on that, but I just wanted to know, like, with the additional study starts in the lower extremity procedures and then the launch in Europe, can you sort of give some color on how we should think about increase in the expenses in the second half?

Yeah, so for R&D specifically, We think that the 60, 70 million that we've told folks that they can count on with the current portfolio plus what we know about in BD is a good number. On the sales side, we are hiring a contract sales organization, and so we will have some additional resources. But frankly, not anything that would cause us to dramatically increase the budgets for those marketplaces. Actually, Anita, you know, the rest of 21 looks very much like the back half of 2019, if you wanted anything that was more specific in terms of what the numbers are. The only outlier really in everything we're doing now is an increase in the G&A line as a result of, you know, some material spend in the legal action against the anesthesia society. Outside of that, the back half of 21 is strikingly similar to the back half of 19. Thank you very much.

That's helpful. That'll be all.

Thank you, Anita.

And your next question comes from the line of Andreas Agorades with Wedbush Securities.

Good morning. Thank you for taking our question. This is Andreas Agorades on for Liana Masatos. Two quick questions here. First, regarding Iovera, you've previously guided it to be a potential $200 million product opportunity in five years. How much of that comes from outside of the U.S.? And then as a follow-up to the pediatric question just now, Again, Guy, can you just remind us what the outlook there is? Is there such a rapid uptake? Is it potentially to exceed the, I believe you must have done to like 100 million? Thanks.

Yeah, so, you know, outside the United States, you know, we're looking for Iovera. We have signed a license agreement for Canada, and we are launching in October into Europe. And if you roll those numbers together, you get something in the neighborhood of, you know, in the $70 to $80 million range in the planning period. I'm sorry, Andreas, can you tell me what the second question was? I was writing down the first question and I missed the beginning of it. I'm sorry.

Yeah, just on the pediatric opportunity.

Oh, I'm sorry.

Previously guided, yeah, so like $100 million. Yeah. Yeah, no, thanks.

That's a really good question, actually. So we guided against the TAM for adults. And so we were basically using extending orthopedics, extending many of the soft tissue procedures, et cetera. What we're finding is a much broader desire to use the product in things like burns. And still in GIGU, I think we're in pretty good shape. But there's a lot of pediatric procedures that were not in our adult TAM. So I think it's safe to say today, especially given the pace of the adoption, that $100 million from my expectations at least would be on the low side of where we're going to end up over the five-year planning period. We haven't come up with anything, you know, specifically. We haven't guided to anything higher than that. What we've looked at is the timeline to $100 million And so I would say increase confidence in the $100 billion number, and that's probably conservative given everything we know now.

Great.

Very helpful. Thank you, guys.

Thanks, Andres.

Your next question comes from the line of Greg Frazier with Truist Securities.

Good morning, folks, and thanks for taking the questions. I got on late, so I apologize if you already covered this, but did you comment on XBRL sales in July?

We did not. No, we did not, other than to say it looked like July. And so given the guidance that we've talked to about high teens and those kinds of numbers, Greg, nothing that would be surprising.

Hey, Greg, this is Charlie. I think the way I'm looking at it is for the couple of months in Q2, the relationship between 21 and 20 just didn't make any sense because of COVID. And now June kind of crossed us over because at this point, June 20 was, you know, we had bounced back from COVID. And so now starting in June, we're now looking at year-over-year comparisons. So I think what Dave is saying is that, you know, July was another good month, but it was, you know, it will compare favorably to last July, but we'll release the actual numbers next week.

Got it. Okay. Two key growth drivers for XPREL have been the brachial plexus nerve block indication and tap blocks. I'm curious how you would describe where you are on the penetration curves for those indications. Would you say it's still early days for both?

Brachial plexus You know, Greg, it clearly was, you know, and not so much just brachial plexus. It was really the entree point for regional anesthesiologists to have some experience with Expirel. So, you know, shoulder and rotator cuff is, you know, leading the way. I would say, you know, fourth or fifth inning with that indication, but I think that would be a bit short-sighted because really their success there has led docs to use Expirel and a number of other, you know, brachial plexus procedures or procedures where a brachial plexus block would be appropriate but not a place that they ever would have thought about using Expirel before, right? So, you know, in the past, if they were going to do, say, a carpal tunnel surgery or an elbow or a wrist surgery, they would have wanted an infiltration protocol just for the use of Expirel in that procedure. Now that they've seen the effectiveness across the whole quadrant, you know, based on a brachial plexus nerve block, you see guys expanding the use of Expirel in that, with that regional anesthesia procedure. So, you know, I think that, you know, we're say fourth or fifth inning, which you're talking about specifically rotator cuff and shoulder surgery, I think it's probably more like the bottom of the second if we're talking about how brachial plexus is going to change the way regional anesthesia is used to address pain control in the upper quadrant, if that makes sense. Pretty much the same story in TAP. TAP was something that folks were doing Before, Expirella was called a rescue tap, and so they waited for patients to wake up in pain, and then they would do the tap, hoping to get the patient through the first post-surgical night. Now we see tap leading the way in increasing the confidence of the anesthesia and surgery community to try these regional blocks. And so, you know, tap is still really important to us as it relates to C-section, etc., But what we've seen as a result of the success with TAP is blocks like the ESP block, the erector spinae block, which is useful in the scoliosis procedures that we were just talking about. And patients or physicians are now using it in a number of different procedures. So I think if you're talking about TAP specifically, it's probably, again, fourth inning, This is a nine-inning game I'm referencing, by the way. And if you're talking about ESP, you know, the rapid expansion of PEC blocks and PENG blocks and a number of different ways that the anesthesia community is learning how to use non-opioid long-acting regional anesthesia blocks, it's probably more like the top of the third. Got it. Thanks for taking the questions. Thanks, Greg.

Your next question comes from the line of Serge Ballinger with Needham and Company.

Hey, good morning. I had two questions. The first one is a follow-up on a prior question related to Zinrelis. The competitors made it pretty clear that they'll be targeting the TKA segment. Just curious if you've seen anything so far. It may be too early given they only launched a month, but maybe if you're expecting any impact, even if it's just transitory. And then second question is related to one of the graphs in your slide deck. I think it's slide number nine, the one that compares the Xperil sales data on a weekly basis to volumes in elective surgeries. We've seen Xperil really outperform the elective surgery volumes. And that performance, I think, really increased in June. Just curious how we should think about that and if it's an indication of Experl's growing role in the ASC or it's really just related to how the claims data are coming in. Thank you.

Yeah, let me take the second one first, Serge, because I think you raised an important point. So it is a compilation of claims data. So it does normalize over time, right? So the delta of six weeks from now is never gonna be as great for last week or for two weeks ago, for example, as the delta in real time, right? So we have real XPREL data and we're comparing that to a compilation of claims data that will change as those claims data come in. What we've seen is that even in a normalized procedure, XPREL is 10 plus points higher than the elective surgery market. So when the elective surgery market is normalized, you know, plus minus very small amounts against the pre-COVID elective surgery line, we still see that XPREL is doing materially better than that. And I think that's what we've seen with the numbers and that's what we expect to see. You know, again, driven, it is driven to some extent by the move to ambulatory surgery and the move to to hospital outpatient departments from insurance companies insisting on those sites of care and the lack of tools that would be available to some of these physicians for pain control in the hospital that are just not available in these same-day surgery environments. But I think, you know, as much as anything else, docs are starting to see that they can do low or no opioid surgeries now. And they're seeing, especially in the PEDS market, that they don't need to use a pump and a catheter. They don't have to worry about whether that catheter is going to fall out or dislodge or whatever. And so I think there is a base of increasing confidence in the use of Expirel for several days with a single administration. In that light, I think you see some more confidence from the STRIDE study Yes, we missed our primary endpoint, but having a P-value at 96 hours has real value to these doctors in the marketplace, and we're seeing that as well. So, you know, I think the curves will normalize, and Expirel will still be 10-plus points better on a normalized basis than the claims data for the elective surgery market in general. Your question regarding the Heron product and knees, the only feedback that we've had is, The product is very sticky. It's very difficult to use. It changes color rapidly, and the docs weren't ready for that. And you can't put it through a laparoscope. We haven't heard anything good, I guess, is what I would say. In the package insert, the pain score stays in the neighborhood of 7 through 72 hours. you know, different than some of the verbiage that we've heard in the marketplace, we can show the physicians the FDA-approved package insert, which suggests that the pain score never gets to anything like the pain score that was achieved in the PILLER trial with Expirel. So, you know, there's very modest trial use. I don't expect it to have any impact on Expirel over time. Any follow-up, Serge? You good?

Nope, I'm good. Thank you.

Okay. Thanks, man.

Your next question comes from the line of Gary Noshman with BMO Capital.

Hi, guys. Thanks. Good morning. I'm also on the competitive dynamics with Heron's product. If it is used in some fashion, do you think they'll be able to get any sort of penetration in the ASCs or are you expecting to really dominate that portion of the market? So, you know, discuss if there are some barriers there based on your experience with uptake in the ASCs.

Yeah, well, you know, Gary, honestly, the only reason that any – the only reason, and I think even they would admit this, that anybody would use Zinrolef is because it's less expensive than Expirel. In the ASCs, routinely, Expirel is reimbursed. So if somebody was going to try it only because it was cheap, that opportunity wouldn't exist because both are going to be reimbursed. In fact, recently CMS increased the reimbursement of Expirel from $1.29 a milligram to $1.33 a milligram. So big customers who have contracts with us can actually purchase XPREL at a slight discount to the reimbursement that they get from CMS. And, you know, we routinely see the commercial payers and the self-insured payers follow CMS's lead. And so I think of all the places that you might use this product, the least that we're worried about is an ASC because there is, you know, it's a narrow label. You can only use it for a few things. I think the package insert is really damaging, not only the safety section, but, you know, the data that shows that at 36, 48, and 72 hours, the pain score is still hovering around 7 in a total knee arthroplasty. That is just not acceptable here. So, you know, like I said, if somebody was going to use it because they were trying to save a couple of bucks, if it's reimbursed, it's reimbursed. Even that option falls away. So I just don't see it.

Okay. And then just a follow-up on Expirel. Just comment a little more on the trends you're seeing in C-section that you just referenced in a previous question. Are there certain types of hospitals that are driving most of the adoption thus far, or is the uptake more broad-based? And any change of how you view that opportunity at this point? And then I'll just squeeze in one last one. Sure. You know, what types of deals have you been most focused on recently in Would they likely be similar to Spine and Iovera? Are you considering anything much more significant at this point to diversify the portfolio more rapidly and further leverage the infrastructure, especially now that you have a competitor in the space? Thanks.

Yeah, thanks, Gary. So women's health, you know, it's no surprise, Gary, that, you know, it's the big institutions, the big women's health institutions that are most interested in providing a short-term stay We see that in a number of different places. You know, we see moms who are really interested in, it's not so much opioid sparing, it's, you know, how do I minimize the exposure of the mom and the baby to any possibility of being in a COVID environment? And, you know, we're starting to see private equity firms and some OBGYN groups around the country building out birthing centers Um, and our involvement there is generally we get a call and they're looking for a same day enhanced recovery after surgery protocol. Um, which takes us into all kinds of curious areas like, you know, how do you discharge the baby on the afternoon? Right. Cause there's no pediatrician standing around in a, in a, in a birthing center or in a place that, you know, so the, the, the problems, the hurdles that we have to overcome are more. you know, tactical around, you know, you change the way that a C-section would be handled so significantly that you have to really construct a way that you can discharge mom and baby a relatively short time after. So, you know, you can see that there's real interest in moving these gales out of the hospital as quickly as possible or not putting them in the hospital at all. And that's largely born in the big cities where you've got, you know, aggressive centers It's also born, frankly, in the southeast, in Tennessee, Alabama, Arkansas, where the big hospital chains would tell you that they lose money on every C-section that they do. These are largely involved in some type of social services payer system, and those payer systems just don't support the mandate for three days, and so they're trying to change those regulations that say that those gals can stay in the hospital for up to three days and have free access to opioids, largely driven by the finances associated with treating that patient population. So again, it's a bit of a different reason to try to shorten the length of stay, but it has the same outcome from a provider perspective. Your last question relative to BD, you know, basically what we've said, Gary, is, you know, we don't have any philosophical or emotional reason that we wouldn't do a big transaction. We have plenty of access to capital given our current scenario or situation. So we would love to do something that further enhances our ability to address our infrastructure opportunities and our relationship with all of these big physician groups, et cetera. We just haven't found the right deal yet. I think we are price conscious. We're not going to do something silly, but we will do that deal if we find it, and we can justify the price and make sure that we're creating value for shareholders. There's no reason why we wouldn't, Gary.

Okay. Really helpful, Dave. Thank you. Thanks, man.

And your next question comes from the line of Tim Chang with Northland Capital.

Hi. Thanks. Dave, could you talk a little bit just about this recent patent? that you guys were issued on Expro. You know, how important is this 495 patent? And sort of comment on just what additional IP you plan to put around Expro. That would be great. Thank you.

Yes, thanks, Tim. Hugely important. You know, as background, our IP was, our Orange Book listed IP was going to expire on December 24th of this year. So now the current patent will extend out to 2041. It's associated, Tim, with observations that were unexpected as we've gone into larger processes, but also in ways that we've improved the manufacturing process for Expirel. you know, we think as it relates to the manufacture of multi-vesicular liposomes that, as you know, are very difficult in the first place, we've further tightened the specs and the opportunity for anybody to be able to make a generic Expirel as it's outlined in the points to consider from the FDA that it would have to be an exact duplicate. It also, Tim, to answer the second part of your question, There are additional product and process opportunities like our current Orange Book listed patent that have been filed with the PTO. And I think probably most important of those is, you know, the new IP gives us an opportunity to also have new IP associated with a new assay. So we release Expirel against a proprietary assay. And having an improved proprietary assay that tightens the specs around what a generic would have to look like, and never telling anybody what those specs are or what this assay is, I think makes this pretty much impenetrable in terms of a patent estate around X4L.

Okay, great. That's helpful.

Thanks, Dave. Good. Thanks, Tim. Good to talk to you, man.

Thank you. I will now turn the call back over to Dave Stack, Chairman and CEO, for closing remarks.

Thank you, Dawn. I'd like to thank you all for participating in today's call. We look forward to keeping you updated on our progress. Next up with us is the Wedbush Conference next week. Thanks all. Stay well. Goodbye.

Thank you for participating in today's conference call. You may now disconnect.